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Norwegianâ€™s Ambitions Test Open Skies Deal

Bjoern Kjos may be experiencing much of what Herb Kelleher did in the early 1970s when he tried to establish Southwest Airlines as a new kind of carrier in the U.S. Like Kelleher, the CEO of Norwegian Air Shuttle is spending an enormous amount of time with lawyers to try to gain regulatory clearance for his new operating model. But what appears to be a dispute over U.S. access and labor standards has much broader implications.

Kjos's Norwegian, Europe's third-largest low-fare airline, has already launched long-haul operations with a growing fleet of Boeing787s. The carrier has applied for and received an Irish Air Operator Certificate (AOC) in the face of an intense lobbying campaign launched by U.S. labor unions and supported by several legacy carriers who aver that the only reason Norwegian is relocating the legal headquarters of its long-haul unit is to bypass strict Norwegian labor laws. Kjos responds that his detractors: â€śWant to keep up their high fares on the transatlantic routes.â€ť

When the European Union liberalized the intra-European air travel market in the 1990s, few airlines took advantage of the new freedoms because they were not useful for their established hub-and-spokes business model. It was only when low-fare carriers like Ryanair and EasyJet arrived on the scene that the new regulations were employedâ€”these carriers introduced services between European countries they were not originally based in. By now, liberalization has allowed the low-fare airlines to develop what is the superior business model on short-haul routes.

Much the same has been true for the open skies agreement between the European Union and the U.S., which was introduced in two steps in 2008 and 2010. So far, the most substantive change was the opening up of London's Heathrow Airport when the legacy Bermuda II agreement was superseded by the new rules. But there were few attempts to step outside of well-known territory and fly from remote bases: Air France tried and failed on the London-Los Angeles route, and Aer Lingus stopped a wet-lease for United Airlines on the Washington-Madrid route in little more than a yearâ€”United's pilots did not like the arrangement at all. The only European airline operating from an EU member state other than its home country is Open Skies, a British Airways offshoot that operates two daily Paris-New York roundtrips using three Boeing 757-200s.

Norwegian, trying to use the EU-U.S. open skies pact to its advantage, plans to fly its 787s from bases throughout Europe. Only a fraction of its capacity will touch Oslo, its original home base. Instead, the airline's 787s might soon be flying from Barcelona to New York, much like it is already operating to the U.S. from Copenhagen, Denmark, and Stockholm.

And Kjos has Asia in his sights: Norwegian already flies to Bangkok, but he would like to add China, India and Vietnam. In fact, he has ambitions to serve all large population bases. To do so, his airline needs traffic rightsâ€”and an EU AOC. While the U.S. treats Norway as if it is part of the European Union (which it is not), Asian countries do not. Therefore Norwegian cannot fly between places such as Barcelona and Bangkok or London and Beijing without a European AOC. The Ireland base also makes the airline eligible for export credit agency and Export-Import Bank financing for both Boeing and Airbus aircraft. The fact that Ireland has signed the Cape Town Conventionâ€”an international treaty to standardize transactions involving movable propertyâ€”gives the airline access to cheaper financing; corporate tax levels are also low. â€śAll of this has nothing to do with labor issues; we do not plan to base any crew in Ireland,â€ť Kjos tells Aviation Week.

The Irish Aviation Authority granted Norwegian Air International (NAI) the much-sought-after approval earlier this month, in what is a major step in turning Kjos's dream into reality. NAI also received an air operating license from the Commission for Aviation Regulation on Feb. 19, which is being filed with the U.S. Transportation Department as part of the airline's application for a foreign air carrier permit. If this is granted, it will allow operations between any point in the EU and the U.S.

Norwegian already has transferred its first Boeing 787-8 to the new EU AOC; the remaining aircraft will be transferred gradually. Also, the administration of the airline's long-haul operation, which currently resides under the airline's Norway-registered subsidiary Norwegian Long Haul, will be relocated to NAI in Dublin.

But now that NAI has its Irish operating certificate, the debate over the carrier's application to serve the U.S. is coming down to interpretations of acceptable labor practices versus what constitutes excessive regulatory meddling under the U.S.-EU open skies agreement. Still unresolved are vast philosophical differences between those who see NAI's efforts as the open market at work pitted against those who believe the carrier is fracturing open skies by skirting home-country labor laws. NAI's filing is a salvo toward critics voicing concern over its plans to base its long-haul operation in Ireland and hire crews through Asian-based agencies.

Norway's Ministry of Transport and Communications (MTC) says Norwegian Air Shuttle planned to move its long-haul operations unless certain of Norway's laws were changed. According to a letter that Norwegian labor union Parat provided to the U.S. Transportation Department docket, NAS, in late 2012, lobbied government officials to allow the hiring of pilots from outside the EU who do not have the required residence permits. The effort failed. In mid-2013, NAS told the MTC in a letter that the airline's planned move of its long-haul activity to Ireland was due to the fact that Norway's immigration legislation was not amended, the MTC explained in its correspondence with Parat.

More important than NAI's intentions is whether the company's actions violate open skies. Opponents, notably labor unions and U.S. carriers American/US Airways, Delta Air Lines and United, argue that NAI's plan is a clear violation of Article 17, a 96-word passage titled â€śSocial Dimensionâ€ť added to the open skies deal in 2010. The key sentence: â€śThe opportunities created by the Agreement are not intended to undermine labor standards or the labor-related rights and principles contained in the Parties' respective laws.â€ť NAI opponents contend the language clearly prohibits what NAI is attempting to do. â€ś[A] Norwegian-based carrier operating under an Irish operating certificate, crewed by employees hired by a staffing agency based in Singapore, to be based in Thailand doesn't pass even a cursory examination of whether it meets the intent of international treaties and regulatory agreements,â€ť argues the Southwest Airlines Pilots' Association.

Most of Norwegian's current long-haul pilots are employed by Global Crew Asia in Singapore and cabin crewmembers are employed by Adecco in Thailand. The airline is establishing crew bases in the U.S. for its expanding transatlantic flying schedule; new routes from London Gatwick Airport will be coming online in June. Kjos has also indicated the carrier will employ U.S. pilots, provided they have a European Aviation Safety Agency license.

John Byerly, former deputy assistant secretary of state and chief negotiator of the U.S.-EU open skies agreement, fundamentally disagrees with the idea that either party could hold back on air service permits because of disagreements over labor standards. â€śThey have a right to fly,â€ť he says. Byerly is a consultant for one of the law firms representing NAI.

Byerly and other NAI proponents argue that the language simply recognizes different labor standards between the signatories, and should not be used to apply single sets of standards. FedEx's stance is: â€śWhile some participants in the [open skies] talks did seek for the U.S. to submit itself to a single labor standard along with Europe, the view did not prevail. For the U.S. to hold otherwise would be the worst kind of revisionist history.â€ť FedEx also decries the three U.S. major carriers' joint filing that calls NAI's proposed serviceâ€”regardless of its legalityâ€”competitively unfair, and therefore worthy of the Transportation Department's rejection. â€śThe unfair complaint . . . appears to be grounded in a special definition of 'unfair'â€”as being anything that U.S. carriers choose not to doâ€”rather than rooted in the traditional aviation law definition of 'unfair' competition being 'discriminatory,'â€ť the freight specialist notes.

Irish and EU officials have publicly protested the â€śflag of convenienceâ€ť label, too. And Norway's transport minister, Ketil Sovik-Olsen, stressed in a recent letter to U.S. Transport Department Secretary Anthony R. Foxx that European legislation regarding safety is harmonized and â€śamong the leading standards globally and there is no doubt that European airlines and the personnel they utilize, are governed by the strict standards of this legislation wherever they operate in the world.

â€śI believe we should not hinder the establishment of new business models just because we cannot know for sure how they will develop,â€ť Sovik-Olsen noted in the Feb. 3 letter.

Kjos is convinced that Norwegian is a hardy pioneer entering hostile territory: â€śMany more low-cost carriers will come after us [on transatlantic routes], we are simply fighting the fight of the first mover.â€ť c

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